If you follow the Twittersphere you may have noticed several people weighing in on this recent piece by Mike Isaac of the NY Times, asking “How Many Angels is Too Many?”
I found myself nodding through all of it with quotes like,
“Seed investing is the status symbol of Silicon Valley,” said Sam Altman
I myself coined the term ENIFA (everyone now is a fucking angel) in 2011 but it didn’t stick as well as the term Unicorn did. Ah, well. I was trying to cheekily suggest that it was the new status symbol. Sam is more succinct and well-stated than I and I’m guessing ENIFA wouldn’t make the NYT.
One of my favorite entrepreneur-Twitterer weighed in,
“You want to keep tapping into their collective intelligence so you keep saying ‘Thank you for the feedback’ and they keep sending it,” Ms. Morrill said.
“But then you are sitting there alone at 3 a.m. and you have to decide on just one thing to focus your tiny team on and your mind races like you had too much to drink but you’re totally sober.
“I love those Beats commercials where the basketball player puts on his music and tunes it all out, to go win the game,” she said. “That’s what it feels like.”
I love how open Danielle has been throughout the development of her startup Mattermark including honest reflections of when she has changed her opinion. They now have a strong VC lead from Foundry Group and from experience when you get advice from Foundry it comes with authority, experience, empathy and the right amount of straight talk. I know because I have been the beneficiary of their advice for years and have appreciated it.
I actually think a strong lead with some well-placed and experienced angels is the right mix. I save room in literally every deal to invite angels (or seed funds) to co-invest with me. All of my partners at Upfront do. The right ones are invaluable additions.
Another founder …
“When I pitched the idea to Adam, he was super on board,” Mr. Sloyan said. By March, a month after Mr. D’Angelo agreed to invest, CodeFights had raised $2.5 million from more than 30 investors. “After they see a name they trust, everybody wants to invest”
It’s called “social proof” and it’s a good thing for entrepreneurs. But we’ve gotten the point where ENIFA and they will invest with no information based solely on the name of who else has invested.
Says Spenser Skates still in the NYT piece
“They don’t do the same sort of diligence,” Mr. Skates (of Amplitude) said. “They hear your story and you send them the paperwork.”
Bingo. And from Nancy Hua …
“Too many angels can also hurt a start-up and be taken as an indication that a company is not strong enough to attract any one “lead” investor, said Ms. Hua of Apptimize. Many angels may also not know the exact health of the start-up they have invested in when asked by others, which can give the perception that the company is not doing well.”
Uhhuh.
In fact, the article was so spot on, so well shaped and formed I was only left wondering three things:
1. Why does Mike Isaac have such a creepy number of people he follows on Twitter?
2. Is it “How Many Angels is too Many?” or “How Many Angels are too Many?” I’m assuming Mike was wrong but was corrected by his editorial staff so I went with IS in my title. His editors can’t be wrong, can they? This is a hard one.
3. Even if one disagrees with the premise, why would anyone feel the need to attack Mike for writing it?
If anything it felt like a public service to founders to me.
Alas.
I’ll give Sam Altman the last quote from the article,
YCombinator also warns young entrepreneurs about taking on too much, too fast. “We tell them very explicitly, they should prefer a small number of investors,”
It’s clearly a subjective topic and I’ll allow that smart people disagree on this topic. Let me at least give you my logic so you can mix into your pot with all the other advice you get on the topic and make your own mind up.
1. If all else fails, angel-load away! If you can’t raise from a few strong angels, from seed funds or from a VC then raising from a ton (let’s say 20+) angels is a perfectly acceptable strategy. There. I said it. It’s not terrible, it’s just not ideal if you can avoid it.
2. Smaller crowds, larger dollars – you matter more to them. It’s that simple. If you have a few number of investors (let’s say 10 or fewer) who have written larger checks or for whom you matter a lot more because you aren’t an index fund to them – you’re much more likely to get commitment in good times and bad.
3. Information Leaks are a Real Problem. Having too many investors can lead to information leaks. Dan Primack talks about the “other angel problem,” which is that too few angels get full information rights and are therefore investing in companies they have little information about. He argues that transparency is right morally (they took a risk) and to get better quality advice. I agree up to a point. If you have 8 well known, high quality angels with impeccable reputations then be as transparent as you like.
If you have 50 investors on your cap table – I’m sorry but you really don’t know what the fuck they’re telling people about your company or whom they’re tell it to. But let me tell you for free. I see emails from angel syndicates all the time for companies I hadn’t even given 2 seconds thought about investing and I get full info, pitch deck and info about the round size and timing. I can’t imagine all of these founders know I’m getting all their materials and I have to imagine that if I’m getting these unsolicited email blasts (I’m bcc’d along with everybody) it must be going to hundreds of people.
That’s a huge problem. Information leaks. One beautiful thing about being a private company is you get to test your pricing, your packaging, your product roadmap, your executive team and your fund raising strategy without public scrutiny or competitors gaining this knowledge.
4. The Pottery Barn Rule Can Save You. With strong leads (VCs, seed funds or large angels) there is an unwritten Pottery Barn Rule. If you invited me into a round in which you invested $2 million and I wrote a $50,000 angel check along with 5 others, my expectation is that if things aren’t working well you – the lead- own the responsibility for working most closely with the founders to help fix it.
Founder fighting, IP lawsuits, high-profile resignations, trouble fund raising, bad product release, 409a complications, community is rebelling against the CEO: You. Own. It.
Every great investor knows this. The problem with leaderless rounds is that when things get really tough nobody owns responsibility. There is no Pottery Barn Rule. Everybody knows a quick $50k write-off is easy, better, faster than the alternatives and better to focus your limited time on finding the next great team to back.
This is the problem that first-time entrepreneurs who have never been through a downturn (we haven’t had one since 2008) couldn’t have the muscle memory for and thus it seems “all good” right now. It won’t be. I’ve seen the movie on the other side of economic shifts. It’s every person for themselves.
I’ve written about this topic for many years including this seminal piece that was oft quoted since I wrote it early in our cycle.
There are thousands and thousands of angel-funded companies. We fund 10-12 companies per year at Upfront where I’m a partner. And we don’t exclude founders who have too many angels (although it’s very rare for us to invest in ones with scores, I’m not sure if we ever have). I have almost no dog in this fight.
I simply want founders to be educated on the topic to be helpful. Feel free to disagree in the comments section. I don’t mind. If that gives readers more perspectives the better.
(Cross-posted @ Both Sides of the Table)
